During its upcoming term the U.S. Supreme Court will hear argument in a landmark whistleblower case, Digital Realty Trust v. Somers. At issue is the scope of protected activity under the Dodd-Frank Act, the most important Wall Street reform law passed in a generation. The court will decide whether employees who report violations internally, to their corporate compliance departments, are protected under the law. Or, must an employee actually make a report to the U.S. Securities and Exchange Commission to be covered under the Dodd-Frank Act’s strong anti-retaliation provisions?

If the Supreme Court requires whistleblowers to report violations directly to the SEC, internal corporate compliance programs will be crippled. Employees at publicly traded companies, who inform their managers of potential violations, will be stripped of protection. The results will be catastrophic, not only for the employees who lose their jobs for trying to do the right thing, but also for investors who must rely upon the accuracy of numerous internal corporate disclosures when making investment decisions, and corporations which have created extensive compliance programs designed as an early reporting system protecting the company from fraud.

The tension between requiring employees to file complaints directly with the SEC, or permitting them to report their concerns to their employers, was the most hotly contested issue when the SEC developed rules governing corporate whistleblowers. Every major corporation in the United States, led by the 40,000-member U.S. Chamber of Commerce, strongly urged the SEC to require employees to initially make reports internally, before they contacted the SEC. They argued that any other rule would undermine the internal corporate compliance programs they had spent years developing.

The Chamber’s fear was simple. Under the Dodd-Frank Act, employees were eligible for a financial reward if their original information demonstrated that a company violated the law. The Chamber argued that if an employee could obtain a financial reward for reporting securities violations, they would bypass internal controls and report directly to the government.

During the rulemaking, the Chamber warned: “Because the Proposed Rules do not require that a whistleblower demonstrate that he or she has used an available internal reporting system to be eligible for an award, they would inevitably lead whistleblowers to bypass internal reporting systems. This will unavoidably undermine the effective functioning of corporate compliance programs.”

The SEC was responsive to the Chamber’s well-organized lobbying campaign, and in the final rules included numerous provisions encouraging or requiring employees to first report violations internally. This included a strong financial incentive for employees to utilize the internal processes before reporting to the SEC.

After achieving these significant concessions, the Chamber and numerous corporations reversed themselves, and started waging a war against their own compliance programs. In case after case they argued in court that the Dodd-Frank Act’s anti-retaliation provisions did not protect employees who raised internal concerns. Instead, they argued that a “whistleblower” had to contact the SEC to be protected.

These cases are mind-numbing. For example, General Electric successfully argued that employees who made reports to their corporate ombudsperson could be fired. Apple Inc. argued that reports to “upper management” were not protected. UBS Securities argued that reports to managing directors were not protected. Other corporations followed suit, arguing that reports to a company’s CEO, president, corporate controller, chief financial officer, director of internal audit, general counsel, audit committee, ethics committee, board of directors, line-supervisors, outside attorneys hired to investigate the fraud complaints, compliance officials, and human resource managers were all not protected.

These arguments have savaged internal compliance. Employees who fear retaliation will not blow the whistle. They will bypass internal compliance. As noted in a 2016 “Blue Ribbon” report sponsored by the U.S. Chamber of Commerce, “the greatest ethics and compliance risk to an organization is an environment where employees are unwilling or unable to make management aware of their knowledge of or suspicions that wrongdoing is taking place … impeding the flow of information that leads to detecting misconduct.” The Chamber-sponsored panel of experts urged corporations to “create an environment where employees are encouraged, prepared and empowered to raise concerns.” Companies had to be willing to hear “difficult news” from their employees.

But company after company ignored this advice, fired employees who raised internal concerns, and then argued in court that those terminations were legal.

Over the past six years, numerous courts have confronted this issue, and have split on their interpretation of the law. The case of Digital Realty Trust v. Somers brings this issue to a head.

Digital had a code of business conduct and ethics that required all employees to disclose evidence of wrongdoing to supervisors or the company’s attorneys. Ignoring their own code, Digital fired its vice president, Paul Somers, after he made reports to “senior management” regarding “possible securities law violations by the company.” Digital argued that Somers’ internal complaints were not protected. The lower court disagreed, and strongly affirmed Somers’ right under the Dodd-Frank Act to alert senior management to securities violations, without fear of being fired.

Digital petitioned the Supreme Court to reverse this finding. Remarkably, the Chamber of Commerce, on behalf of its 40,000 members, agreed with Digital, and filed two briefs asking the court to hear the case and deny protection for internal whistleblowers.

The Dodd Frank Act’s reward provisions did not kill corporate compliance. The SEC issued rules encouraging employees to report violations internally. Instead of exploiting these compliance-friendly procedures, the Chamber of Commerce and its allies went to war against their own compliance programs. If the Supreme Court decides in favor of Digital Realty, corporate compliance programs will be dead, and their reputations forever tarnished. In the wake of a Digital victory, whistleblower advocates would be committing professional malpractice if they did not warn their clients against internal reporting.

Even if the Supreme Court rejects Digital Trust’s arguments, the damage has been done. The hostility exhibited by numerous corporations and the Chamber of Commerce (“on behalf of its 40,000 members”) cannot be ignored. It exposes deep-seated hostility both to whistleblowers and corporate compliance programs. Employees who witness securities fraud need to understand the legal limitations of compliance programs, and carefully consider taking the Chamber’s advice to bypass internal programs and file their claims directly with the SEC, anonymously and confidentially.

Stephen M. Kohn is a partner at Kohn Kohn & Colapinto LLP in Washington, D.C., and the author of “The New Whistleblower’s Handbook: A Step-by-Step to Doing What’s Right and Protecting Yourself” (Lyons Press, 2017). He has represented whistleblowers since 1984.

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